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Does Anyone Know If Capital Gain Tax Applies To a Website Sale

Discussion in 'Accounting, Tax & Legal' started by Chris C, 16th Jun, 2009.

  1. Chris C

    Chris C Well-Known Member

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    I was just wondering if anyone knew how the sale of a income producing website is judged for tax purposes if it is built from the ground up?
     
  2. Superman

    Superman Well-Known Member

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    Chris,

    Can you provide more information.

    Is it a sale of a web based business?

    Or are you in the business of creating websites and selling them off for profit?

    Are you likely do build up another one and then sell it off down the track?

    How long since you first started the site until when you sold it (or plan to sell it)?

    Thanks
     
  3. Chris C

    Chris C Well-Known Member

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    I guess that depends on how you define web based business? and I'm not sure what needs to be occurring on or around the site for it be considered a web based business.

    Also I manage quite a number of sites, 10+ (and that number is always increasing) so my decision to sell is not a reflection of me selling my entire business or anything, just one website that I operate.

    The majority of the sites I run main source of revenue is advertising. Though the selling point of these sites won't be their advertising revenue it will be the traffic they produce which is more leveragable by other businesses than myself.

    Not at the moment, but if I was to start selling some more of these smaller sites I had you could argue that I was, but once again all the websites I produce will also produce advertising revenues that would justify them being held as assets.

    I'll really only be looking to sell these sites if I can get good offers for them, but I expect that I probably will given the those in the industries I service would profit a lot more out of the traffic of my sites than I would.

    The short answer is yes, but not in the same industry.

    I'd imagine it'd be a minimum of 6 - 12 months before they were sold.

    I hope these responses help. If you have any further questions please feel free to ask.
     
  4. Superman

    Superman Well-Known Member

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    Thanks for your prompt and articulate responses Chris!

    OK, based on the information supplied I believe if you sell off one of your websites that you are selling an asset.

    This I believe is in contrast to someone like a franchisor who sells franchises and the sale of them is normal income (i.e. not a capital gain from the sale of an asset). Based on your answers selling the website is currently outside the normal course of business thus should be treated as the sale of an asset.

    The sale of the website asset will be a CGT event in my opinion.

    This is good - you should be able to access CGT concessions :)

    Assuming the website came into existence more than 12 months ago, you will be entitled to the general 50% CGT discount on the profit on the sale. As the website would also be considered an 'active asset' in your business, you will get an additional 50% discount.

    So if bought it for $0, sold it for $20k your gross capital gain will be $20k. Less 50% discount = $10k, less another 50% active asset discount = $5k. The $5k will be added onto your taxable income.

    But wait - there's more!

    You can elect to defer the capital gain for up to 2 years under the provision that you will buy a replacement asset (i.e. under the provision you will purchase a replacement website to redevelop and earn money from). If you don't end up buying one, then 2 years later you pay the tax in that year.

    If you do replace it (which may be impossible to find something to replace it with if it is unique) the the CGT is deferred until that asset is sold.

    It gets a little complex correctly completing the CGT schedules on your business tax return - so ensure your tax agent knows what they are doing.

    DISCLAIMER:
    The above answer is my opinion. I have not done anything more than basic research on the specifics of the sale of a website and can only go on the information you have provided.

    I would love to hear alternate opinions - I know these types of questions are favourites of tax studies at unis and CA / CPA programs. Maybe there is some guru who can shed some light on this area?

    SM
     
  5. Chris C

    Chris C Well-Known Member

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    WOW! Thanks for the awesome response! You really are the barer of good news!

    :)

    That said, I do have a couple of follow up questions.

    At what point (as in how many of these websites sales would it take) do these "assets" stop being interpreted as asset sales that are taxed as a CGT event and begin to be taxed as a normal part of business?

    Also, do you have to buy a replacement website after the the sale, or can you buy one before?

    Also what happens if you sell a couple of assets can you offset the gains of those sales against the purchase of one big website purchase? and vice versa?
     
    Last edited by a moderator: 18th Jun, 2009
  6. TryHard

    TryHard Well-Known Member

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    Hi Chris

    It's great advice from Superman ... but I would also suggest you talk with your accountant about the aim of your business.

    The reason I say that is we are in a similar business and run a number of traffic-generating websites. We've been made offers for some of them in the past, for the same reason you've outlined you might sell yours.

    None of these sales would attract CGT in our case - the websites are not an asset - they are the equivalent of buying an ad in the Yellow Pages and then later selling the rights to the ad to another party (or letting them have your phone number).

    The site was never an asset, but a well-devised advertisement designed to get someone to do something. The domain name to which the website is attached is also not owned by anyone - you simply lease the right to use the name, but more recently are allowed to sell that right to another party. You don't own the infrastructure over which the ad is delivered. In fact, your 'rights' to the site are pretty temporary and will completely expire if you don't pay a domain registrar or webhost to keep the package alive.

    Unless you are at the very high end of the industry (think DBS that owns 550,000 domain names !) , I would suggest looking at such sales as a CGT event you could be setting yourself up for a lot of expensive administration and confusion.

    If however you sell a business, which happens to include a domain name and website, the 'business' portion would be a different kettle of fish.

    Cheers
    Carl
     
  7. Chris C

    Chris C Well-Known Member

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    Thanks for your response Carl, but now I'm confused.

    So are you saying that you would pay no tax on the money earned from their sale?

    So then what does this mean?

    What would this imply?
     
  8. TryHard

    TryHard Well-Known Member

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    Capital Gains Tax applies when you make a capital gain. What I'm saying is that there is no CAPITAL gain. Of course you'll pay tax on income, as a good corporate citizen should :)

    You don't own much, except the concept and some content. The domain name is not yours, you 'lease' it, for all intents and purposes. You don't depreciate the website, it's not an asset in that way (at least the way we operate them, they aren't)

    If you sell a business and make a profit my understanding is that would trigger a capital event. The distinction is whether running a simple website and selling ads is a business, and in a lot of cases it's simply an advertising vehicle you have the rights to for a period of time, as per the examples above.

    Cheers
     
  9. Chris C

    Chris C Well-Known Member

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    LOL - so your saying that all the moneys derived from the sale of a website are taxable given that it isn't a CGT event.

    However the argument is then, what is for sale. If you are just selling a domain name then arguably you are not selling an asset you own, but with all the websites I'd sell there would be a reasonable amount of content included (ie the files that make up the site) and these are not leased from anyone, I created them from the ground up. They are the main part of any website purchase most of the time anyway. Sure a pretty domain name is nice and all but without the files you don't have a website... and lets not imply that with a domain name and web host you have yourself a successful "advertisement billboard".

    Anyway so how do you find out how the ATO would rule on a case like this? Surely there would have to have been some precedents set in Australia in the not too distant past.
     
  10. TryHard

    TryHard Well-Known Member

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    Mate if I was you I'd engage an accountant and explain your operation. If you can't decide if you're developing a growth asset or earning income, it's gonna be hard for the ATO to rule anything. Because of course, yes, all monies derived from the sale of anything are taxable, one way or another :rolleyes: Personally I think by bringing capital gains into the equation you are creating yourself a messy accounting nightmare, but I could be (and often am) wrong :D
     
  11. Superman

    Superman Well-Known Member

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    I started to reply to this post on Friday, however got distracted.

    With a clear head I would like to say that this thread is the perfect example of why any information contained within these forums is no substitute of competent PAID professional advice.

    That said, I would like to further contribute to the discussion while not contradicting my above advice as this is an interesting case study.

    To re-phrase Chris C's originally questions, we basically need to know whether the sale of a website is taxable, and assuming yes, is it treated as a capital gain or normal taxable income?

    I have done some research and unfortunately I cannot locate anything that specifically address the above question, however I have found a ruling from 2001 that does provide some applicable information and guidance that can be applied.

    Based on Chris Cs previous answers, he is in the business of generating advertising revenue through website assets.

    The applicable Tax Ruling is 2001/6 (see attached). There is a lot of information, and for a non tax accountant it probably doesn't make sense.

    Paragraph 37: Costs incurred by an existing business when setting up a
    website that establishes, replaces or significantly extends the profit
    yielding structure are considered to be of a capital nature.


    Now, I am assuming the creation and development of these websites was undertaken by Chris C himself - so not much in the was of costs would have been incurred. This means it is possible that the website will have a $0 cost base for CGT purposes.

    Carl previously mentioned that a website is not an asset. Based on the ruling I disagree - the software component will be considered an intangible asset. Refer to the attachment which describes what indicates what is software and what is simply content turned into HTML.

    Also check Paragraph 8: The website may be the entire business, or merely part of an existing one.

    I would advise Chris C to treat each website as separate little business, so separately track the income and expenses (such as server hosting, domain registration fees etc) for each website.

    Either way, the income generating websites are capital assets, and the sale of the them would be considered a CGT event.

    If the CGT asset was 'acquired' more than 12 months ago, you get the 50% general CGT discount. This could be a little tricky to determine sometimes, but this is from the CCH tax guide:

    If a taxpayer constructs or creates a CGT asset and owns it when the construction is finished or the asset is created, it is acquired when the construction, or the work that resulted in the creation, started. It makes no difference if the asset is a physical asset or an intangible asset.

    This means when you commence building the website, this is the acquisition date for CGT.

    A website asset would also be considered an active asset - so an additional 50% discount will apply.

    I previously mentioned the deferral option for 2 years, and replacement asset rollovers. My instinct tells me it may be difficult to find a replacement asset such as another income earning website in your situation, as you are more likely just to create another one from scratch.

    Also, if you apply the CGT discounts, and end up with the remaining 25% as the taxable amount (i.e. added onto your other taxable income), you can put this amount into super to wipe out all the CGT completely. You have a $500k lifetime limit in doing this.

    The deferral, rollover and super options are quite complex areas by themselves so I will not go into too much detail here.

    I still recommend you obtain some paid advise for a tax accountant, or even apply for a binding private ruling if you want absolute certainty.

    I am aware the the information I have provided contradicts the information Carl put forward (maybe this information was based on the opinion and advice of his accountant?), however it is difficult to use it as a comparison unless your two businesses are identical - which is unlikely.

    And by the way - bringing capital gains into these kinda of things is great - much more preferable compared to treating it as normal trading income - unless you like paying more tax than you legally have to? You I.T. people may think capital gains is a nightmare - however I consider the back end of a website a nightmare and wouldn't consider trying it myself!

    SM
     
  12. Chris C

    Chris C Well-Known Member

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    Once again I just want to say a massive thank you! I really appreciate the feedback as it always helps when you are seeking professional advice (which I will definitely need in this case) so that I know the sorts of questions I should be asking...


    It has turned out to be very interesting indeed, and it would appear the ramifications of this really has the magnitude to move my business in a whole new direction, or alternatively shut down a lot of options.

    I was a little worried by the clause "existing business" what happens if there was no business per se when the website was established?

    Most of my websites (at least the earlier ones) were started as a hobby more than financial revenue. I only really started making good money ($1000+/month) out of them in late 2006. I only registered an ABN in the 07/08 financial year and have only been registered for GST and submitting BAS statements since the 08/09 financial year...

    I have definitely paid designers and other individuals to help in the construction/development from time to time. Does this have any major implications?


    Ugh...

    :mad:

    What does it take for an asset to be active? What happens if I haven't actively worked on a site for many months. As in I hadn't made any updates to it or anything?

    Well it depends what you mean by "replacement". There are loads of sites for sale out there - SitePoint Marketplace - it's just that no site is the exact same of any other site.

    So what does "replacement" mean? If it just means buying another site that earns income then this wouldn't be a big issue. If means buying a site that is on the exact same topic, that is earning similar money to the site sold, etc etc then that might be a little bit harder.

    Also what happens if you do find a replacement? Does that mean the remaining 25% of the proceeds from the sale of the original site which were to be added to my taxable income, are they now no longer payable?

    Are there any reasons you see such an option being an issue in this case? Because I'd definitely rather have money put into super rather than pay tax (even though I'm personally not a fan of super)...

    LOL, I would seem we both harbour the natural human trait of being scared of the unknown, with the unknown for me being, tax law, the unknown for you being IT.

    And of course there is always the ramifications of tinkering with things you don't fully understand, for me my meddling would probably result in a little bit of jail time or a hefty fine... :rolleyes: - for you some tinkering with the backend of a website could have the website imploding on itself (there is nothing worse than a poorly placed or forgotten number here or an equals sign there breaking the entire site).

    ... ahhh life's little unknowns.

    :D
     
  13. TryHard

    TryHard Well-Known Member

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    Hi SM

    I don't think your advice is contradictory - it makes perfect sense given what CC's description could mean.

    In our particular case, we haven't actually ever sold any of our sites so have never had to test whether there was a CGT event, but (in our case) I doubt there would be, we have 50-60 sites, each doing some small bit for our business or a client's business, and none would been seen to "replaces or significantly extends the profit yielding structure". Some of the sites we have built for clients I think would qualify as capital assets, because some of these sites are the only transaction processing / advertising medium their business has.

    I understand what the ATO was / is trying to achieve, but I think it is a pretty rare website that "significantly" extends a profit yielding structure ... might come down to the definition of the word significant.

    The other issue is a relatively new industry in Australia called 'domaining' where a registrant can onsell the rights to the domain name alone. The domain name often has nothing attached to it, and has simply been registered with the idea of reselling at some time in the future (eg. the sites offered at Buy and Sell Australian Domain Names | Netfleet - The .AU Aftermarket). This onselling has only recently been allowed for .au domains (its been big business in .com for a number of years). To me that could only be like renting a PO Box and then onselling the right to another party - and can't for the life of me see how anyone could say a tangible or intangible capital asset has changed hands.

    Interesting discussion, I think I'll avoid selling anything for a while just in case :)

    Cheers
    Carl
     
  14. Rob G.

    Rob G. Well-Known Member

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    Just about any proceeds that are not regarded as income can be assessed for CGT.

    The concept of ordinary and statutory income for a business is much broader than for an investor.

    The definition of a CGT asset is very broad.

    A CGT event can occur where the underlying CGT asset value is unaffected.

    A CGT event can even occur in circumstances which don't involve a CGT asset.

    Business sales typically involve a mixture of income and capital receipts.

    However, there are a lot of CGT exemptions and concessions where a business is sold. So it is important to accurately assign reasonable sales proceeds to the capital components to fully utilise concessions.

    Examples of intangible CGT assets would be goodwill, licenses, contracts, leases, designs, restraint of trade clauses.

    Examples of intangibles that would not be CGT assets would be intellectual property that you use for producing assessable income and qualifies for Division 40 depreciation (e.g. copyright or patents).

    Where you sub-lease this would usually be income, but where you assign a lease it could be capital.

    Get legal and taxation (and maybe superannuation) advice on your specifics.

    Cheers,

    Rob
     
    Last edited by a moderator: 21st Jun, 2009
  15. Superman

    Superman Well-Known Member

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    Don't forget the software infrastructure component of a website is also an intangible asset.

    Chris C - You should take the time to read through the tax ruling on my previous message - especially the examples. You don't need to become an expert, however it should give you some direction and assist you moving forward.

    If you like you can send me a specific list of questions (as simplified as possible please) and I will try to answer them in plain English.

    Cheers
     
  16. TryHard

    TryHard Well-Known Member

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    Guys

    I don't mean to drag this out, and clearly any advice will be specifically related to the individual business and operations.

    But here's an example

    - Bob. B registers a domain name iwouldliketoscreamdownamountain-ffffffff!.com.au. Cost say $99 for 2 years

    - He then hosts it with dreamhost.com for $5USD per month

    - He hires someone in Russia to write some code for a freebie CMS to do something special - $150USD

    - He writes some content - costs him 3 hours of his time

    The site gets some interest because it is about moutain biking for people with Tyrett's syndrome

    A rich dude offers him $10,000 for the whole lot above and Bob B sells it

    Is anyone honestly trying to say the domain name or the software infrastructure could be classed as a capital asset ? What the !??

    This is so commonplace, and you own nothing, you claim no depreciation (nor should you) I really must say the general gist of this thread is that people are completely complicating something that works simply for 98 % of the business population.

    Agreed, TOTALLY different if you are a HUGE online operation when the website is an asset ... but fair suck of the online sauce bottle !!
     
  17. Chris C

    Chris C Well-Known Member

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    That seems like a very unrealistic example not mention makes no reference as to if the site generates an income.

    Most website purchases these days are more calculated factoring in an assortment of variable, just like any real-world business would be assessed.
     
  18. TryHard

    TryHard Well-Known Member

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    Actually mate it's an example of 90% of the 'website' sales occurring now :) Like I said, I agree there will definitely be 'some' websites that substantially "establish, replace or significantly extend the profit yielding structure" of an entity, but unless you're a very unique case I doubt you're in that playground, from what you've described here. But either way, enjoy :)

    PS oh by the way, if the site generates an income, as it should, it's taxable, via the entity/structure/sole trader/person that owns it
     
    Last edited by a moderator: 22nd Jun, 2009
  19. Rob G.

    Rob G. Well-Known Member

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    HA HA ... so businesses involving intangibles are not subject to tax unless they are really big operators ?

    Cheers,

    Rob
     
  20. TryHard

    TryHard Well-Known Member

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    I am sure businesses involving 'intangibles' are subject to CGT, but I leave analysis of my business to our accountant. My question is, are you certain there is an intangible capital asset involved in the sale of a 'website' in general ? ... If you give a pack of 500 of your business cards to someone, and charge them more than you paid the printing firm, do you pay CGT ? I think this is a 'sledgehammer to crack a walnut' thread .... :D